UMediC (0256) is a fast-growing distributor of medical equipment and manufacturer of medical consumables with customers across more than 30 countries. Backed by solid prospective earnings growth over the next 2 years, BUY with a TP of RM0.90 based on 25x PER over FY24 EPS of 3.6sen, a considerable discount to its Bursa listed peers due to its smaller market capitalisation.

As the Malaysian government allocated RM766m for the procurement of medicines in Health Ministry hospitals, UMediC is witnessing notable potential in tender opportunities for its Marketing and Distribution (M&D) segment that offers attractive GP margin of 35% - 40%. Not to be left behind, UMediC is expanding horizontally into laboratory equipment and laboratory consumables via the acquisition of Patho Solutions (M) SB, which allows UMediC to cover four out of five main categories within the medical industry. Though contributions from Patho Solutions (M) SB is currently minimal by comparison, we believe UMediC will leverage on its superior GP margins of 40% to grow its market share within the fast-growing medical equipment supplies industry.

For the manufacturing segment, UMediC current operation is based in a 8,300sqft production facility, which is 90% utilized. As part of its expansion, UMediC has completed the construction of its new factory measuring 21,346sqft, which will effectively double its production capacity. Upon completion, UMediC will be able to launch its new products including (i) prefilled humidifier with macro nebulisation system (nebuliser) (end-CY23) and (ii) sterile water for inhalation bag (Q1-CY24). Additionally, UMediC also will be able to increase the production capacity of its HydroX series prefilled humidifiers and AirDroX series inhaler spacers. Meanwhile, for products such as HydroX prefilled humidifiers in which UMediC’s cost of production is at least 20% cheaper than the competitors’ imported products, UMediC is confident a surge in import substitution demand to drive the new factory to full utilization by Q2CY24. As such, we estimate UMediC’s manufacturing segment will deliver 33%/23% of earnings growth in FY24/FY25 in line with the ongoing expansion.

UMediC has recently announced an issuance of 24.93m new shares to fulfill the Bumiputera Equity Condition. Post this exercise, UMediC’s net cash holdings would increase by another RM17m (assuming issuance price at RM0.70/share) pushing total net cash to RM31.4m thus enabling the company for greater expansion flexibility plus the opportunity for a transfer to the Main Board.

Source: Rakuten Research - 10 Nov 2023

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